Hope on Credit

In 1976, Muhammad Yunus, a charismatic economics professor,
started an experimental project to reduce poverty in remote
rural villages in Bangladesh. His success soon defied all
expectations and went well beyond even his own initial ambitions.
The scheme, which had been born in the informal economy of
street peddlers, artisans, and other subsistence ventures,
grew into a formal bank in less than a decade. Its remarkable
results attracted the interest of experts from institutions
like the World Bank and inspired people from developing and
industrialized nations alike, including the United States.
It was an unusual twist in a tradition of technology transfer,
where methods, techniques, and ideas have usually flowed from
the industrialized world to developing countries.

The essence of the project was the belief that tiny loans
could enable landless peasants to escape poverty. Yunus was
not the only one working on this idea. The beginning of microlending,
as Jeffrey Ashe  an expert in the field  puts
it, was like the invention of fire: It happened at the same
time in settings as different as India and El Salvador. But
the Grameen Bank in Bangladesh, which originated from the
university research project Yunus started, soon became emblem-
atic of microlending's success. Twenty years after it had
begun, the experiment had evolved to become a formal bank
with 1,118 branch offices in Bangladesh and loans in excess
of $2 billion. It served more than two million clients, who
were primarily landless villagers, 94 percent of them women
 the most disenfranchised of the rural poor in Bangladesh.
And, the proportion of the loans repaid, over 90 percent according
to the World Bank and others, was comparable to that of the
Chase Manhattan Bank, noted author David Bornstein in The
Price of a Dream: The Story of Grameen Bank.

Moreover, while expanding at a breathtaking rate, the bank
reported operating profits for almost every year between 1986
and 1997, with the exception of 1991 and 1992. And, although
inexpensive funds and grants from donor agencies initially
helped Grameen, increasingly it came to rely mostly on market
resources. Beyond the financial results, World Bank experts
found that Grameen was having an impact on poverty: Wages
increased in villages where the bank operated, borrowers saw
increases in their savings and in per capita consumption,
and even the school enrollment of their children seemed to
increase.

Propelled by the enthusiasm that Grameen and other developing
country programs generated, microlending projects sprouted
and spread around the world, reaching about 15 million people
to date. In the United States, microlending programs began
to appear in increasing numbers in the mid to late 1980s and
received support from the government and the media. Yet, the
transfer of lending techniques from the developing world to
the economic and social environment of an industrialized nation
posed significant challenges. It also raised questions about
the differences between poverty in developed and developing
countries, and about the difficulties of adapting institutions
from one culture to another.

FERTILE GROUND

The inspiration for what eventually became Grameen Bank came
from Muhammad Yunus's close contact with village life in Bangladesh.
Studying the growing problem of landlessness among villagers,
Yunus had found that, in many cases, peasants would lose their
property after illness or a poor crop forced them to borrow
money at rates as high as 600 percent a year. Lack of access
to credit at reasonable rates also prevented the cash-strapped
peasants from growing businesses, increasing their profits,
or building up their wealth. For instance, rickshaw pulling
was a common occupation among men, but most rickshaw drivers
did not own the vehicles they operated. What they made after
paying rental fees barely allowed for subsistence. If instead
of paying rent they could pay back a loan, in a year they
could own their own rickshaw and start building up assets
 and maybe even another business for a second source
of income.

The concepts behind microlending were hardly new. It had
long been recognized that access to credit was crucial for
creating and retaining jobs, promoting small businesses, and
revitalizing neighborhoods. But lending money to the poor
had traditionally been difficult. Small loans are expensive,
as interest revenues are small relative to administrative
costs. And historically many financial institutions have been
wary of lending to the poor, since low-income people often
lack collateral and established credit records.

So, Yunus and other microlending innovators sought ways to
manage the risk and reduce the costs associated with lending
to the poor. In the absence of any physical collateral to
guarantee loans, they explored the use of "social collateral"
 using peer pressure and social ties to ensure repayment.
One way of doing this was to make loans to groups of borrowers
rather than individuals and withhold future credit until all
the members of the group had repaid their portion of the loan.
In this way, group members had a strong interest in ensuring
that fellow members paid their dues, by either supporting
each other through unexpected difficulties or exerting pressure
in case of delinquency. Since members needed to think carefully
about whom they trusted in order to form a group, the lender's
cost of screening applicants was reduced.

Another strategy developed to manage risk
was "stepped lending." By starting with tiny loans
 often below the level needed by borrowers  and
promising access to larger loans on payback, lenders limited
their exposure while creating incentives for timely repayment.
In turn, clients who had no previous experience with borrowing
had a chance to develop credit records from scratch and gradually
build up confidence and experience before tackling larger
risks.

These innovations borrowed heavily from
informal traditional arrangements in developing countries
where, in the absence of formal financial institutions, family
members or close friends were sources of credit, and the pooling
of resources was common. Some microlenders also blended rituals
and traditions from the local culture into the lending process,
and the results were unique lending protocols. For example,
Grameen groups elected leaders and held mandatory regular
public meetings where  aside from paying loan installments
publicly  members did the Grameen salute, recited slogans,
and, in some village centers, performed a series of physical
exercises. The particular protocols varied from setting to
setting, adjusting to local cultures. There are currently
79 Grameen replication projects in countries ranging from
Bolivia to Uganda. The two largest of such projects, in Malaysia
and Nepal, serve over 35,000 clients each. And, this listing
includes only projects that receive funding from the Grameen
Foundation  an organization dedicated to promoting Grameen-style
antipoverty programs. Other organizations and institutions,
including the World Bank and the U.S. Agency for International
Development, have studied the Grameen example and derived
lessons from its experience. They also learned from organizations
such as ACCION International, based in Somerville, Massachusetts,
which has been successfully promoting microlending in Latin
America for over two decades. Using this knowledge, they have
funded similar programs in developing countries.

ON DOMESTIC SOIL

With this international backdrop, the practice
of microlending took off in the United States. It was not
a completely new idea; small business loan funds had existed
for many years, and Congress itself had recognized the importance
of financial services in the development of strapped communities
when it drafted the Community Reinvestment Act in 1977. But
these initiatives had tended to focus on low-income housing,
large commercial developments, or on relatively large businesses
of up to 500 employees.

The really small businesses of one to five
employees had not received much attention. However, the recession
that began in mid 1990 seemed propitious for the growth of
microlending in the United States. Downsizing in big corporations
made many middle-class families feel economically vulnerable
and increased the appeal of self-employment. Growing concern
that the incomes of less educated workers were stagnating
highlighted the need for ways to alleviate poverty. Yet, the
effectiveness of government programs was under attack and
welfare-to-work ideas were gaining momentum. Microlending,
with its emphasis on personal empowerment and bootstrapping
oneself out of poverty, was an appealing option for conservatives
and liberals alike.

A number of Americans involved in microlending
programs in developing countries decided to bring home the
lessons learned abroad. Two of the earliest and most prominent
organizations in the United States were founded or based in
Massachusetts. Jeffrey Ashe established Working Capital in
Cambridge in 1990, after a decade of experience with microlending
in South America, Africa, and Asia. Today, his organization
raises money by borrowing from banks and foundations, runs
its own operation in Boston, and extends services through
community associations in Massachusetts, New Hampshire, Delaware,
Miami, and Atlanta. Likewise, Somerville-based ACCION International
was galvanized to expand into the United States, where it
targets a largely Hispanic market in New York, New Mexico,
San Antonio, Chicago, San Diego, and El Paso.

ACCION U.S. and Working Capital are not
alone. The number of microlending programs grew rapidly in
the 1990s and, the organizations have received federal support
and funding, particularly from the U.S. Small Business Administration.
At the last count in 1996, there were 266 organizations in
46 states, up from only a handful in the mid 1980s, according
to the Aspen Institute. Over 170,000 people had been served
and over $126 million had been disbursed in loans.

LEARNING BY DOING

But adaptation to the U.S. environment has
not been easy. "This is by far the most difficult setting
for doing a microenterprise program I've seen," says
Working Capital's Jeffrey Ashe.

Microlending programs have thus far found
it hard to achieve the scale and the financial independence
they aspired to in the United States. ACCION, one of the largest
and most successful microlenders in the country, reaches about
1,000 active clients, but would like to be reaching 5,000
borrowers, says William Burrus, senior vice president for
U.S. Operations at ACCION. The percentage of operating costs
covered by ACCION's U.S. programs ranges from 20 percent in
New Mexico to 60 percent in El Paso, with the rest being covered
by grants and donations from private and public sources. The
programs that have been the most successful at covering their
costs are those that have the largest client pools and operate
in areas where the cost of living is lower, according to Robin
Ratcliffe, vice president of communications at ACCION.

At issue is not loan delinquency. The repayment
rate at ACCION U.S. is about 95 percent (it is about 98 percent
in Latin America). Rather, running a business is much more
difficult in an industrialized nation than in developing countries.
Small businesses here must deal with regulation, taxes, insurance,
health benefits, and the like, as well as more sophisticated
competition. Thus, training, technical assistance, and support
networks have proved crucial for the success of microenterprise
owners and microlenders have evolved toward greater provision
of these services. While such support reduces the risk of
default, it is also extremely time- and labor-intensive, raising
the microlenders' operating costs and limiting their expansion.

At the same time, competition limits the
interest rates U.S. microlenders can charge. "You have
credit cards moving down into the microenterprise markets;
it is easier to get home equity types of loans; and even the
banks themselves are pushing down at least to the top part
of our market," comments Jeffrey Ashe.

Moreover, the number of potential small
borrowers in the United States is relatively much smaller
and more geographically dispersed than in developing countries,
where microenterprises or the "informal economy"
can make up between 60 and 80 percent of the economy. A developed
economy has better established safety nets and offers many
more opportunities for wage employment. And this has been
especially true in this country over the last couple of years
which have seen record low unemployment rates. As a result,
microlenders have had to undertake more aggressive and costly
outreach efforts in the United States.

Program strategies have evolved to meet
the needs of particular U.S. market segments. Many programs
help people who have higher levels of education and income
than those of more traditional poverty-alleviation strategies.
These programs tend to cater to already established businesses,
emphasize credit, and offer a more limited amount of networking
and training opportunities.

Other programs have chosen to specialize
in serving welfare-to-work clients and people below the poverty
line. They emphasize the training part of microenterprise
assistance. "It's incredibly labor-intensive," says
Mary Brown of Jewish Vocational Services, the largest of such
programs in Boston. A high percentage of clients never get
as far as starting their own businesses. Of those that do,
many find that their new businesses are not the sole key to
economic self-sufficiency, but a way to supplement the family's
income, says Rutgers University professor Lisa Servon.

Furthermore, techniques effective in developing
countries have not always been workable here. Most domestic
microlending programs use some version of stepped loans, but
businesses here have greater capital requirements and often
need to get to the larger-sized loans faster, which puts the
microlenders at greater risk. Group lending techniques have
had a mixed reception. Only 20 percent of the programs that
offer credit use group lending, according to the Aspen Institute.
"People don't seem to want to participate in groups,"
says ACCION's William Burrus. "They are more individualistic
and not used to operating in communal-type activities."
So, most microlenders are making individual loans using methods
much closer to bank lending  often requiring some form
of collateral  but simplifying the underwriting to fit
the size of the loan. Thus, U.S. microlending organizations
have been going through a process of experimentation and learning
as they figure out what works best here. And they are still
working at it. "The first microloan was made by ACCION
in Recife, Brazil, in 1973," notes Robin Ratcliffe. "But
it really took another ten years of experimentation and model
development to reach what we know today as solidarity group
lending. It's what invention is all about."

REAPING RESULTS

Although microlenders are still perfecting
their programs, the results of their efforts are beginning
to show and the impact is most clearly seen at the level of
individual borrowers. For Charlotte Tyler, after years of
working "odd jobs," as she puts it, it has made
a big difference. "I knew what I wanted but I did not
know how to get there," she says. The Micro Business
Development Program in Barre, Vermont, helped her figure out
the finances and get a loan to produce fragrant and elaborate
homemade ornamental soaps. Now, soap is her main source of
income. But the road is not easy for a microenterprise owner.

Pat Foley was one of the first to join Working
Capital in New Bedford, Massachusetts, and her experience
illustrates both the success and the difficulties faced by
these entrepreneurs.

Pat learned of Working Capital through an
advertisement in the local paper. At the time, she was working
part-time at property management. She was also making hand-painted
clothing, which she sold at fairs, and was looking to expand
this as a business. However, she had had some credit problems
in the past and did not think banks would lend to her. "I
was looking for a small loan, but when I went to Working Capital's
informational meeting and heard about the whole package, I
found it attractive," she says.

During the five and one-half years Pat has
been with Working Capital, she has changed her line of business
twice, searching for something that would be satisfying and
also generate sufficient revenue. Her latest business might
be it: She has just opened The Magic Palette, an art supply
store near the site of a future art school in downtown New
Bedford.

Throughout the business changes, Pat has
received both support and advice from Working Capital, and
has seen her loan amounts rise incrementally from the initial
$500 loan. But Pat says that the greatest benefit she has
received is not the loan money but rather the access to a
business network she didn't have before. Pat's electrician,
her insurance broker, her florist, and even the person who
made the balloons for her grand opening were all contacts
she made through Working Capital. She uses their services
and they, in turn, pass out her cards and go to her store.

Pat has also learned a lot through informal
advice, at workshops, and from volunteer business consultants.
Now that she has received her first "big" loan of
$10,000, the credit part of the deal has become more significant.

Pat's entrepreneurial spirit and the assistance
that she has received have also had a small but visible impact
on New Bedford. In a city that has lost 13,000 manufacturing
jobs over twelve years and suffered the decline of the fishing
industry, Pat's bright purple awning stands in the midst of
boarded-up storefronts. Students gather at her store for art
classes and local artists exhibit their work on her walls.

Still, success is not assured. Pat works
about fifty-five hours a week and pays for her own health
insurance. Currently, all her revenues are going back into
the business, so she depends on what her husband earns as
a contractor. But, if she can survive until students come
to the new UMASS Dartmouth Visual and Performing Arts School,
which is scheduled to open next year, she will probably have
the security of a stable clientele.

As Pat well knows, running a microenterprise
is not easy and is not for everyone. In developing countries,
a tiny loan for a subsistence business may offer survival
to a large number of people. In this country, it is more of
an opportunity for those who have the drive to work for themselves
and are willing to take the risks and put in all the effort
it takes.

DREAMS AND OPPORTUNITIES

Microlending organizations in the United
States will probably never reach the size or have the impact
of an institution like the Grameen Bank in Bangladesh. And,
total self-sufficiency is also unlikely.

Alleviating poverty, particularly in industrialized
nations, takes more than correcting credit-market failures,
as microlenders are well aware. "We have to be working
with all the other housing, social, and human services poor
people need," says Christopher Sikes, director of the
Western Massachusetts Enterprise Fund.

Just as poverty solutions crafted in industrialized
nations have not always worked as intended when transplanted
in developing countries, microlenders have had to adjust their
methods and strategies in the process of adapting to the U.S.
environment. But, even when microlending is not used strictly
as a poverty alleviation strategy, it can play an important
role in making opportunities available to those who have the
desire and determination to try their entrepreneurial hand.

Perhaps the biggest strength of microenterprise
assistance is that it gives people the opportunity to learn
firsthand what it takes to be an entrepreneur and the chance
to aim for success. Even when the microenterprises do not
succeed, the endeavor is not a total loss, as individual owners
will have gained work experience and business knowledge that
could be useful in the future or help in landing a job.

While results may have fallen short of their
dreams thus far, those who started microlending in the United
States have given people like Pat Foley and Charlotte Tyler
an opportunity to bring their own entrepreneurial dreams to
life. "What microenterprise development does is take
an idea that is a person's own and make it manifest in the
world. It is a place for people to check things out for themselves
and find how they can best make what they want to be doing
work for them. When they are driven by that, rather than a
dollar, they are happier and more motivated," says Sikes.
"That is the most powerful thing we can do."

U.S. MICROLENDING in brief

Microenterprises are considered to be the smallest of
small businesses: those that employ less than five people
and generate less than $250,000 in annual revenues. Many
of those that seek assistance are sole proprietorships earning
closer to $40,000 a year.

Typical businesses that receive microloans include apparel
production, retail and wholesale product sales, professional
services, catering, and day care.

Microloans generally range from $500 to $25,000, and are
made for business development.

Loans tend to be complemented by training or technical
assistance as well as networking.

Many owners work their businesses part-time to supplement
the income from other jobs.

Funds come from bank credit lines, government sources,
and foundations.

INSPIRATION: Entrepreneurship and Need

The reasons people go into microenterprises
are as varied as the entrepreneurs themselves. After John
Gingras was downsized from his job as a darkroom technician,
he enrolled in massage therapy classes and took a three-month
business course from the Micro Business Development Program
in Burlington, Vermont. With this training, he started a massage-delivery
company, Blind Faith Massage, and hopes to cater to businesses
and health clubs. For Marguerite Knight of Ludlow, Vermont,
it was a lifestyle change. After working for twelve years
as a respiratory technician, she quit her full-time job to
start a company that sells gifts for the home and garden.
Working from home means she gets to see a lot more of her
three-year-old daughter.

Lisa Servon of Rutgers University
and Timothy Bates of Wayne State University studied the reasons
people choose self-employment in microenterprises in the United
States. Some end up in self-employment after unplanned life
events such as divorce, pregnancy, or having been laid off.
Others, particularly in rural areas, use microenterprises
to supplement their income rather than move to places that
offer better jobs. A minority are "true entrepreneurs,"
those who prefer to work for themselves even if it means longer
hours and less money than they would earn in paid employment.

Regardless of their initial motivations,
most microenterprise owners claim that they prefer self-employment
because it offers greater flexibility, freedom, and control,
and because they have pride in what they do, say Bates and
Servon.